OREANDA-NEWS. Fitch Ratings has assigned TIG Finco PLC (Towergate), the new holding company for the Towergate Group, the following ratings:

Long-term Issuer Default Rating (IDR) of 'B-', Stable Outlook
GBP75m super senior secured notes due 2020: 'BB-'/'RR1'
GBP425m senior secured notes due 2020: 'B'/'RR3'

Fitch has also downgraded Towergate Finance Plc's Long-term Issuer Default Rating (IDR) to 'RD' (Restricted Default) from 'C', before withdrawing the rating. Fitch has also downgraded Towergate Finance Plc's senior secured and senior unsecured notes to 'RD' and withdrawn the ratings. A full list of rating actions is provided at the end of this commentary.

The downgrade to 'RD' follows the completion of a financial restructuring under a UK Scheme of Arrangement. The Scheme of Arrangement constituted a distressed debt exchange under Fitch's criteria, because investors faced a reduction in terms and the restructuring was conducted to avoid a traditional payment default.

The 'B-' IDR assigned to Towergate reflects the continued pressure on free cash flow generation and Fitch's expectation of limited organic growth given the challenging market environment. The rating further reflects the meaningful execution risk that still remains in completing the transformation plan as the company looks to integrate its new corporate structure. Towergate is a new company which, under the Scheme of Arrangement, continues the business activities previously undertaken by Towergate Finance Plc.

KEY RATING DRIVERS

Execution Risk of Reorganisation Remains
The transformation plan has largely been completed, with the majority of the associated costs already incurred. The company expects these measures to benefit profitability from 3Q15 onwards. Fitch believes that significant execution risk still remains in extracting the required operational efficiencies to improve profitability and reduce leverage over the next two years.

Pressure on Free Cash Flow
Cash restructuring costs continue to put pressure on Towergate's free cash flow (FCF) generation, although these costs are expected to reduce from 2016 onwards, with the completion of the transformation plan. Contributing to a negative FCF profile are payments Towergate might have to pay as redress, in respect of past advice provided by Towergate Financial on Enhanced Transfer Values (ETV) and Unregulated Collective Investment Schemes (UCIS). Fitch believes that these restructuring and compensation costs could result in Towergate's FCF profile remaining negative until end-2016.

Tight but Improving Liquidity Position
Fitch expects the overall liquidity position to improve, driven by a combination of lowered interest expense (reduced to GBP44m p.a. from GBP94m), and declining cash costs associated with the transformation plan. However, the company does not have access to many alternate sources of liquidity. The new capital structure does not include an RCF for additional liquidity, and the possibility of non-core asset sales remain limited. Towergate disposed of Haywards Aviation for a net consideration of GBP23m to cover short-term liquidity needs in December 2014, and has just completed the sale of Towergate Financial for GBP8.6m. Financial flexibility therefore remains constrained.

Muted Organic growth
Prevailing market conditions, combined with the disruption caused by the transformation plan particularly in the Towergate Insurance Broking (TIB) division, are expected to continue to constrain the company's ability to grow organically in 2015. As cost savings materialise and the Strategic Business Unit becomes fully operational, Fitch expects reduced operating costs and increased sales revenue to contribute to improved organic performance.

Weak Deleveraging Profile
Fitch expects funds from operations (FFO) adjusted gross leverage to remain above 6.5x and FFO fixed charge coverage around 1.5x over the next two years, limiting financial flexibility. Material deleveraging is not forecast during this period, at least, as the challenging operating environment in the UK non-life insurance market is expected to prevail. Market conditions could therefore partially offset the deleveraging potential of the transformation plan.

Leading UK Non-Life Intermediary
Despite the recent financial distress and weakened operating performance, Towergate continues to maintain its leading position as an independent insurance intermediary in the UK, and remains a high-margin business. It continues to maintain its relationship with leading insurance providers and has a wide distribution platform and significant underwriting capacity in the niche segment of the personal and SME commercial non-life insurance market.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Organic revenue remaining flat for 2015-2017
- EBITDA margin increasing to above 26.5% % from 25% in 2015-2017, driven by organic growth and realisation of operational efficiencies
- Capex and restructuring cash outflows as per management guidance
- FFO adjusted gross leverage increasing towards 7.5x by 2016 before easing from 2017 onwards, driven by reduced costs associated with the transformation plan and the running off of costs associated with UCIS/ETV
- Liquidity remaining satisfactory during 2015-2017

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:
-FFO adjusted gross leverage below 5.5x on a sustained basis
-FFO fixed charge cover above 2.5x on a sustained basis
-Improved cash flow generation with no sustained cash burn forecast and sustained positive FCF
-Sustained organic revenue growth

Negative: Future developments that could lead to negative rating actions include:
- FFO adjusted gross leverage above 7.5x on a sustained basis, due to a combination of underlying market conditions and lowered earnings arising from the changed business structure
- FFO fixed charge cover below 1.5x on a sustained basis
- Structural change in the business profile resulting in permanently lower margins
- Lack of improvement in EBITDA margin, suggesting no efficiency gains realised from the transformation plan
-Sustained period of negative FCF after the end of the transformation plan

LIQUIDITY AND DEBT STRUCTURE

Towergate's new capital structure following the sanctioning of the Scheme of Arrangement comprises new super senior secured notes and senior secured notes. The super senior secured notes are parri passu with the senior secured notes, but rank first upon the application of proceeds upon enforcement.

Both series are bullet maturities and long-dated, with repayments commencing in February 2020. Fitch expects smaller interest costs to improve liquidity. The non-amortising profile of both series of notes will also help preserve cash in the business. However, cash restructuring costs continue to represent a material use of cash, followed by interest on the notes and capex.

Other sources of liquidity remain limited and the new capital structure does not contain a RCF. There is, however, a provision for an additional but uncommitted GBP50m of credit facilities.

FULL LIST OF RATING ACTIONS

TIG Finco PLC
-Long-term IDR: assigned 'B-'/Stable
-Super senior secured notes: assigned 'BB-'/'RR1'
-Senior secured notes: assigned 'B'/'RR3'

Towergate Finance Plc
-Long-term IDR: downgraded to 'RD' from 'C'; withdrawn
-Senior secured notes: downgraded to 'RD' from 'CC'/'RR3'; withdrawn
-Senior unsecured notes: downgraded to 'RD' from 'C'/'RR6'; withdrawn